Climate Policy and Future Coal Markets: Analysis with the COALMOD-World Model

1. Add picture on dark green area (see slide 9 for an example) Climate Policy and Future Coal Markets: Analysis with the COALMOD-World Model 34th IAEE International Conference Collaborative Conversations II: World Coal Markets June 21st, 2011, Stockholm, Sweden Clemens Haftendorn Franziska Holz Christian von Hirschhausen

2. Four Propositions about Climate policy and its Interactions with the Global Steam Coal Market Proposition 1: The relevant mechanisms to be considered are pure demand and supply effects that will be called “market adjustments”. Proposition 2: A global and binding climate agreement is crucial to avoid negative market adjustments from unilateral demand reducing policies. Proposition 3: A faster implementation of the CCS technology would have the greatest benefits on emissions reductions. Proposition 4: Unconventional supply-side climate policies need to be considered.

3. Four Propositions about Climate policy and its Interactions with the Global Steam Coal Market Proposition 1: The relevant mechanisms to be considered are pure demand and supply effects that will be called “market adjustments”. Proposition 2: A global and binding climate agreement is crucial to avoid negative market adjustments from unilateral demand reducing policies. Proposition 3: A faster implementation of the CCS technology would have the greatest benefits on emissions reductions. Proposition 4: Unconventional supply-side climate policies need to be considered.

4. Types of Carbon Leakage and “Market Adjustments” Source: Dröge, Susanne. 2009. “Tackling Leakage in a World of Unequal Carbon Prices, Synthesis Report.” Technical report, Climate Strategies. Market adjustments are broader and include both negative and positive effects

5. Modeling Approach: COALMOD-World model COALMOD-World model (equilibrium model in MCP format) with profit maximizing players with respect to sold quantities and investments. • Model players: Producers who produce, transport overland and sell the coal to local demand nodes or to the exporters. Exportersoperate the export terminal, transport the coal over sea and sell it to demand nodes with import terminal. • The players can also invest to expand their production, export or transport capacities that are constrained. • The model is multi-period and runs till 2030 in 5 years steps calculating yearly market equilibria. Specification: • 41 demand nodes, 25 producers, 14 Exporters. • Virtually all demand for steam coal in the world. • Models global international seaborne trade as well domestic markets such as China, USA, Russia… Reference:Haftendorn et al. (2010), COALMOD-World, DIW Discussion Paper 1067

6. Individual Scenarios in Scenario Space Investments in Production Policy shock Intensity of Global Climate Policy Effort Constrained Unconstrained Current Policies Unilateral European Climate Policy New Policies Indonesia supply- side Policy CCS fast roll-out 450 ppm Scenarios from IEA WEO 2010

7. Four Propositions about Climate policy and its Interactions with the Global Steam Coal Market Proposition 1: The relevant mechanisms to be considered are pure demand and supply effects that will be called “market adjustments”. Proposition 2:A global and binding climate agreement is crucial to avoid negative market adjustments from unilateral demand reducing policies. Proposition 3: A faster implementation of the CCS technology would have the greatest benefits on emissions reductions. Proposition 4: Unconventional supply-side climate policies need to be considered.

8. Unilateral European Climate Policy • In this scenario of Unilateral European climate policy the European Union goes a step further and aims at reducing CO2 emissions of 30% compared to the level of 1990 by 2020 with further reductions in the future. • The leads to following steam coal demand reduction in comparison to the two reference scenarios Current Policies and New Policies:

9. Modeling Results for Unilateral European Climate Policy: Global Carbon Dioxide Emissions. Unconstrained investments in production capacity Constrained investments in production capacity CO2 emissions based on Current Policies scenario 29% 66% CO2 emissions based on New Policies scenario in million tons CO2 Actual reduction from unilateral EU policy Emissions from market adjustment Remaining emissions

10. Four Propositions about Climate policy and its Interactions with the Global Steam Coal Market Proposition 1: The relevant mechanisms to be considered are pure demand and supply effects that will be called “market adjustments”. Proposition 2: A global and binding climate agreement is crucial to avoid negative market adjustments from unilateral demand reducing policies. Proposition 3:A faster implementation of the CCS technology would have the greatest benefits on emissions reductions. Proposition 4: Unconventional supply-side climate policies need to be considered.

11. CCS Fast Roll-out Starting in 2020 • Prerequisites: Technological breakthroughs, a favorable regulatory framework, strong political support. • Implementation: installed capacities of coal power plants with CCS projected by the WEO IEA (2010) in the 450 ppm scenario are put in place five years earlier. • Half of capacity replaces existing older coal power plants, the other half is integrated in the power system as additional capacity, successfully competing with other technologies. CCS power plants are assumed to have 38% efficiency and a capacity factor of 82%. • Two demand shocks: half of the CCS capacity that is added to the coal demand and the lower efficiency of CCS power plants requires additional coal to produce the same amount of energy.

12. Modeling Results for CCS Fast Roll-out: Global Carbon Dioxide Emissions. Unconstrained investments in production capacity Constrained investments in production capacity CO2 emissions based on New Policies scenario Captured emissions from additional CCS capacity Captured emissions from CCS capacity replacing conventional coal power plants in million tons CO2 Avoided emissions through market adjustment Remaining emissions

13. Four Propositions about Climate policy and its Interactions with the Global Steam Coal Market Proposition 1: The relevant mechanisms to be considered are pure demand and supply effects that will be called “market adjustments”. Proposition 2: A global and binding climate agreement is crucial to avoid negative market adjustments from unilateral demand reducing policies. Proposition 3: A faster implementation of the CCS technology would have the greatest benefits on emissions reductions. Proposition 4:Unconventional supply-side climate policies need to be considered.

14. Yasuní-type supply-side policy in Indonesia The Yasuní-ITT initiative was proposed by the Ecuadorian government. • Goals: combating global warming, protecting biodiversity and indigenous people, implementing a sustainable social and energetic development. • Measures: No exploitation oil reserves of the Ishpingo-Tambococha-Tiputini (ITT) oil field within the Yasuní National Park (20% of the Ecuadorian oil reserves) • Financing: at least half of the earnings Ecuador would receive from exploitation. 3.635 billion USD supplied by the international community to a fund managed by the UNDP. • Emissions savings: The initiative represents 407 Mt CO2 saved from not using the oil resource and an additional 820 Mt CO2 mitigation potential over 20 years from avoided deforestation and forest management Scenario for Indonesia: • Issues: Steam coal exploitation in Kalimatan is potentially endangering one of the greatest rainforests in the world and its biodiversity through deforestation and local air and water pollution. A recent publication points out that coal mining has little to no beneficial effects on the local economy (Fatah, 2008). • Measure: Export restriction in Million tons per annum (Mtpa):

15. Modeling Results for Indonesian Supply Side policy: Global Carbon Dioxide Emissions. Unconstrained investments in production capacity Constrained investments in production capacity CO2 emissions based on Current Policies scenario CO2 emissions based on New Policies scenario in million tons CO2 Avoided emissions through market adjustment Remaining emissions

16. Conclusions and Policy Recommendation for the EU Climate Policy • Top 1: Reach a globally binding climate agreement on the level of the non-binding commitments of the last climate conferences (Copenhagen and Cancún). • Top 2: Support the expansion of CCS locally and globally. • Top 3a: Go a step further in implementing a more ambitious climate policy if the goal of Top 1 is reached. Or combine with Top 3b to hedge negative market adjustment risks. • Top 3b: Be open for unconventional supply side climate policy. Europe Unilateral and Indonesia supply-side in the Current Policies, constrained investments framework.

17. Thank you very muchfor your attention! Any questions or comments? chaftendorn@diw.de

18. Literature • Dröge, Susanne. 2009. “Tackling Leakage in a World of Unequal Carbon Prices, Synthesis Report.” Technical report, Climate Strategies. • Fatah, Luthfi. 2008. “The Impacts of Coal Mining on the economy and Environment of South Kalimantan Province, Indonesia.” ASEAN Economic Bulletin 25(1). • Haftendorn, Clemens, Franziska Holz and Christian von Hirschhausen. 2010. “COALMOD-World: A Model to Assess International Coal Markets until 2030.” DIW Discussion Paper 1067. Berlin. • Hotelling, Harold. 1931. “The Economics of Exhaustible Resources.” Journal of Political Economy 39(2):137–175. • IEA. 2010. World Energy Outlook 2010. Paris: OECD. • IPCC. 2011. “The IPCC Special Report on Renewable Energy Sources and Climate Change Mitigation - SRREN Generic Presentation.” • Sinn, Hans-Werner. 2008. “Public policies against global warming: a supply side approach.” International Tax and Public Finance 15(4):360–394

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20. Possible Interaction between Climate Policy and Coal Markets: Intertemporal Extraction Path Change • Change in extraction path over time? Strategic behavior of resource owners? (Green paradox, H.-W. Sinn based on assumptions of the classical Hotelling model) Extraction Price to consumers PCt Prices/ Costs Scarcity Rent Net price Pt = PCt - MCt with climate policy without climate policy Marginal costs MCt Time Time t

21. No Scarcity Rent to be Expected: No Strategic Behavior Possible Source: IPCC. 2011. “The IPCC Special Report on Renewable Energy Sources and Climate Change Mitigation - SRREN Generic Presentation.” Problem with this approach: more coal on earth than will ever be consumed, hence no long term scarcity rent, and an overall competitive market: Such a strategic behavior is impossible. More relevant: Leakage effects and market adjustments between countries with different climate policies.

22. Global Emissions Results

23. Structure and Countries of COALMOD-WorldCountries

24. Structure and Countries of COALMOD-World Basic model structure with energy value conversion E*k=Q E*k=Q E*k=Q $/GJ Quality factor: k = t / GJ C Pe Freight rates PJ E Pc } $/t } Port operation costs Q Transport costs $/GJ P } P: Producers E: Exporters C: Consumption }: Capacity restriction PJ Transport costs } C Pc